Transcript THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2004: What Next For The U.S.

THE ECONOMIC & FINANCIAL MARKET
OUTLOOK THROUGH 2004:
What Next For The U.S. & California
Economies?
A Presentation To The Annual CMTA
Pre-Conference Workshop
South Lake Tahoe, California
April 19, 2004
ANOTHER "JOBLESS RECOVERY"
Cumulative % Change In Private, Non-Farm Payrolls Before
And After The Cyclical Low Point
7
C
U
M
U
L
A
T
I
V
E
Recession
Recovery
6
5
Avg., Past 6 Long
Economic Cycles*
4
3
G 2
R
O
W 1
T
H
0
3/90-7/92 Cycle
Current Cycle, 11/00-3/04
-1
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26
Months Before And After The Cyclical Low In Economic Activity
* Based on six economic cycles back through 1953.
Source: U.S. Commerce Department
"MISERY'S"* WARNING FLAG FOR THE PRESIDENT
Cumulative % Chg. In The "Misery Index*"
20%
Current Recovery
(11/01-3/04
15%
10%
5%
0%
-5%
3/91-7/93 Recovery
-10%
-15%
0
3
6
9
12
15
18
21
24
27
30
33
36
Months From The Start Of Recovery
* Avg. of inverted index for job gains, rolling 12-mo. periods, and an index of retail gasoline prices.
Sources: U.S. Dep'ts. Of Energy and Labor
INVENTORIES UNUSUALLY "LEAN" VS. SALES
Business Inventory-Sales (I/S) Ratio
1.49
1.47
Rolling 3-Year
Avg.
Monthly
1.45
1.43
1.41
1.39
1.37
1.35
1.33
1.31
Dec-96
Dec-97
Dec-98
Dec-99
Source: U.S. Department Of Commerce
2/04
Dec-00
Dec-01
Dec-02
Dec-03
U.S. EXPORT ORDERS RESPOND
TO A WEAKER DOLLAR
60
% Rept'g An Increase
Index: 2000=100
112
Export Orders, Mfd.
Goods
110
(Left Scale)
58
108
56
106
54
104
52
102
3/04
100
50
98
48
"Real Trade-Weighted" $*
(Right Scale)
46
96
94
92
44
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
* Based on the dollar's inflation-adjusted, trade-weighted exchange rate against 44 other currencies.
Sources: Nat'l Ass'n Of Purchasing Mgrs.; J.P. Morgan & Co.
A BETTER SHOWING BY CALIFORNIA DURING THE
CURRENT ECONOMIC CYCLE
Non-Farm Job Growth; Year-Ago Percent Change
4.5%
CA
3.5%
2.5%
U.S.
1.5%
3/04
0.5%
-0.5%
Note: Bars Denote U.S. Recession
Periods
-1.5%
-2.5%
Dec-89
Dec-91
Dec-93
Source: U.S. Dep't Of Labor
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
TRADING PLACES: NORTHERN CALIFORNIA ON THE
LEADING EDGE OF THE ECONOMIC SLOWDOWN
Yr-Ago % Change In Non-Farm Payrolls
6.2%
5.2%
4.2%
3.2%
Central Valley
2.2%
1.2%
0.2%
-0.8%
2/04
-1.8%
No. California
-2.8%
-3.8%
So. California
-4.8%
-5.8%
Note: Bars Denote Recession
Periods
-6.8%
-7.8%
Dec-89
Dec-91
Dec-93
Source: U.S. Dep't Of Labor
Dec-95
Dec-97
Dec-99
Dec-01
Dec-03
CALIFORNIA'S ECONOMIC GROWTH DRIVEN BY
"DOMESTIC," NOT “EXPORT” INDUSTRIES
Year-Ago Percent Change In Employment, March 2004
6%
"Export" Industries
5%
"Domestic" Industries
4%
-4%
-5%
M
f
g
-6%
-7%
Source: California Employment Development Department
Leisure &
Hosp.ity
Government
-3%
I
n
t
e
r
n
e
t
M
o
t P
I I
o c
n t
u
r
e
s
Educ & Health
Svcs
-2%
T
e
c
h
Software Pub.
-1%
Resid. Constr.
0%
Total Nonfarm
1%
Prof & Bus Svcs
2%
Real Estate
F
I
n S
l v
c
s
3%
A MORE VULNERABLE CA HOUSING MARKET
TO HIGHER INTEREST RATES?
% Of Households Qualifying For The Median-Priced Home, By Selected
Area
60
50
12/96
40
12/00
2/03
2/04
30
20
10
0
U.S.
CA
LA
Source: California Association Of Realtors
SF
Cent. Valley
ECONOMIC OUTLOOK: THE U.S. AND CALIFORNIA
ECONOMIES COMPARED
Year-To-Year Percent Change, Unless Otherwise Specified
1991
1992
1993
2000
2001
2002
2003
Forecast
2004 2005
-0.9
-1.9
2.7
-1.2
2.7
-0.8
3.7
6.5
0.5
-1.3
2.2
1.9
3.1
3.0
4.1
3.7
3.0
2.7
Unemployment Rate (%)
U.S.
6.9
California
7.7
7.5
9.3
6.9
9.4
4.0
4.9
4.8
5.4
5.8
6.7
6
6.7
5.8
6.2
6.0
6.2
Housing Starts/Permits
U.S. (Starts, MM)
1.01
California (Permits, Th) 105
1.2
98
1.29
84
1.57
149
1.60
149
1.71
168
1.85
198
1.86
196
1.67
189
Other Key California Data
Tax. Retail Sales(% Chg.) -3.9
0.6
-0.1
12.0
0.0
-0.2
3.1
4.2
4.9
Population (% Chg.)
Net Inmigration (Thus)
2.1
225
1.3
-45
1.9
322
1.9
364
1.7
308
1.6
251
1.5
237
1.4
199
"Real" GDP/ GSP
U.S.
California
2.3
224
Source: The UCLA Anderson Forecast, March 2004
AGGRESSIVE COST-CUTTING HELPS SUSTAIN THE
RECOVERY IN MARGINS AND PROFITS
Year-Ago % Change, Selling Prices Vs. Non-Farm Unit Labor
Costs*
5%
4%
Margin Pressure
Note: Bars Denote
Recession Periods
3%
2%
Selling Prices
'03Q4
1%
0%
-1%
Margin Expansion
Unit Labor Costs
-2%
-3%
-4%
Mar-89
Mar-91
Mar-93
Mar-95
Source: U.S. Commerce Dep't.
Mar-97
Mar-99
Mar-01
Mar-03
WEAK "PRICING POWER" DRIVES A TECH-LED
INVESTMENT RECOVERY
Year-Ago Percent Change, Inflation-Adjusted Spending
28
24
Info Processing Equipment
'03Q4
20
16
Low-Tech Equipment
12
8
4
0
-4
-8
Structures
-12
-16
-20
-24
01-Mar-91
01-Mar-94
Source: U.S. Commerce Department
Note: Bars Denote
Recession Periods
01-Mar-97
01-Mar-00
01-Mar-03
"APPRECIATING-CURRENCY" COUNTRIES LIFT
U.S. IMPORT PRICES & “PRICING POWER”
Year-Ago Percent Change, Import Prices Of Manufactured Goods
7%
5%
Canada
Europe
3%
3/04
1%
-1%
-3%
"Emerging Asian"
Economies
-5%
-7%
Dec-99 Jun-00 Dec-00 Jun-01 Dec-01
Source: U.S. Department Of Labor
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
SMALL BUSINESS "PRICING POWER" ON THE RISE
Percent Of Small Businesses Reporting Price Increases
20
Mar. '04
16
12
8
4
0
-4
Recession
Period
-8
Dec-94
Dec-96
Dec-98
Dec-00
Source: National Federation Of Independent Businesses (NFIB)
Dec-02
A LOOK BACK AT THE LAST
“UP CYCLE” FOR INTEREST RATES
The Treasury Yield Curve, Selected Periods; Yields In Percent
7.3
Federal Funds Target Rate,
5/16/00=6.50%
5/18/00
6.3
6/29/99
5.3
11/18/98
Fed Funds Target Rate,
11/17/98=4.75%
4.3
0
5
10
15
20
Years To Maturity
Source: Bloomberg Financial News, Inc.
25
30
35
HOW CLOSE A CLASH BETWEEN PUBLIC &
PRIVATE-SECTOR BORROWING?
Year-Ago % Change In Federal & Non-Federal Borrowing
15%
'03Q4
10%
Non-Federal
5%
0%
-5%
Federal
-10%
Dec-89
Dec-91
Dec-93
Dec-95
Source: Federal Reserve Board
Dec-97
Dec-99
Dec-01
Dec-03
THE FEDERAL RESERVE KEEPING THE POLICY
"PEDAL TO THE METAL"
The Federal Funds Rate Less The PCE "Deflator;" Percent
5.0
4.0
3.0
Avg., 1969-2003=2.6%
2.0
1.0
Fed "Easing" During The
Sluggish 1991-92 Recovery
0.0
Note: Bars Denote
Recession Periods
-1.0
-2.0
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
3/04
Jan-00
Sources: Bloomberg Financial News, Inc., U.S. Commerce Dep't
Jan-02
Jan-04
EIGHT SURPRISES FOR 2004
* ANOTHER TERRORIST ATTACK
* THE “CARRY TRADE” UNRAVELS
* “DISINFLATION” LINGERS ON
* A DOLLAR TAILSPIN
* SAUDI TURMOIL
* A CHINESE RECESSION
* A DEMOCRATIC ELECTION VICTORY
* POLICY STRAINS BEGIN TO SHAKE THE EURO
BOND MANAGERS STILL CAUTIOUS
Portfolio Duration Vs. Target, In Percent; 4-Wk. Moving Averages
104
103
102
101
100
99
98
"Neutral" (100% Of
Benchmark Duration)
97
4/13/04
Week
96
95
94
25-Dec-01
25-Jun-02
24-Dec-02
24-Jun-03
Source: Stone McCarthy Research Associates, Inc.
23-Dec-03
22-Jun-04
EARNINGS GROWTH TO PROPEL STOCKS HIGHER
Yr.-Ago % Chg.
Qtr-To-Qtr % Chg
80%
25%
19%
S&P 500 Earnings Growth
(Left Scale)
Forecast*
13%
60%
40%
7%
20%
1%
0%
-5%
-11%
-17%
S&P 500
(Left Scale)
-20%
-40%
-23%
-60%
Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
* First Call "bottom-up" consensus estimate, including goodwill adjustments.
Source: First Call, Inc.
A FAIRLY TIGHT LINK BETWEEN THE S&P 500 P/E
MULTIPLE AND INTEREST RATES
16
14
S&P 500 Price Per $ Of Opng. Earnings
27
Percent
10-Yr T-Note
(Left Scale)
23
12
19
10
8
15
4/5/04
6
11
4
P/E Ratio
(Right Scale)
7
2
0
Jan-79
Jan-82
Jan-85
Jan-88
Jan-91
Jan-94
Jan-97
Sources: Standard & Poors, Inc.; Federal Reserve Board
3
Jan-00
Jan-03
SEEMINGLY "RICH" STOCKS "CHEAP" VS. BONDS
Yield Ratio*
S&P 500 P/E Multiple
27
23
1.8
S&P 500 P/E Multiple
(Left Scale)
1.6
1.4
19
1.2
15
4/16/04
1.0
11
0.8
7
Yield Ratio, Bonds Vs. Stocks
(Right Scale)
3
Jan-79
Jan-83
Jan-87
Jan-91
Jan-95
Jan-99
Jan-03
* Ratio, 10-Yr. Treasury yield vs. earnings-price yield (E/P) on S&P 500 stocks.
Sources: Standard & Poors, Inc., IBES, Federal Reserve Board
0.6
0.4
"DEFENSIVE" STOCKS* TURN WITH
INTEREST RATES
Cumulative % Chg., Past 4 Bus. Cycles*
6
3
3
Cum. % Chg. In 10-Yr. Treas.
Yields
(Right Scale)
1
-1
-3
0
-5
-3
-7
-9
-6
-9
-11
Cum. % Chg. In "Defensive" Vs.
S&P 500 Stocks
(Left Scale)
-12
-13
-15
-17
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48
Month's From Recession's End
* Health care and consumer staples. Expansions beginning 12/70, 4/75, 1/83 and 4/91.
Source: Federal Reserve Board; Citigroup, Inc.